Rates pegged as house prices drop

The Halifax, Britain's biggest mortgage lender, yesterday reported the sharpest fall in house prices for four years, the clearest signal to date that the country's housing boom has run out of steam.

The growing pace of decline in the property market was a key reason the Bank of England yesterday held interest rates steady at 4.75% for the third month running, said analysts.

Some economists still think there might be another rate rise, to 5%, early next year but a growing number believe they have peaked in the current cycle and some are even beginning to forecast cuts in the second half of next year.

The Bank did not issue a statement to accompany its announcement but City economists say a run of weak data on the economy in the past couple of months had persuaded the monetary policy committee to hold fire.

Economic growth slowed to 0.4% in the third quarter of the year from a robust 0.9% in the second quarter. "The Bank was right to do nothing this month. It's clear the economy has slowed since the summer as the earlier rate rises have begun to take effect and global conditions have become more difficult," said CBI chief economist Ian McCafferty. "Quite how well the economy performs into next year is highly uncertain, so the MPC should keep rates on hold."

The Halifax said the average house price fell by 1.1% last month, the biggest drop since October 2000 and following a revised 1.3% rise in September.

October's slide, which is bigger than the 0.4% fall reported last week by the Nationwide, dragged the annual rate of house price inflation down to 18.5%, the first figure below 20% in six months. The quartterly number, which irons out monthly fluctuations, showed a drop of 0.4% in the latest three months, the first fall since the last quarter of 2000.

Halifax said the housing market now seemed to be slowing, following the strong period of growth in early 2003 and 2004 - mainly due to higher interest rates which have put the cost of borrowing up by a third.

"Recent price movements confirm that the Bank of England's rate hikes have taken impetus away from housing demand while first-time buyers continue to be held back by affordability constraints," said Martin Ellis, chief economist at the Halifax.

He said many other indicators, such as mortgage approvals, the number of sales agreed and the amount of buyer interest, were all waning and pointing to a further slowdown in the market.

Housing market experts remain divided into bulls and bears. The bulls argue that high employment and a robust economy mean prices will only drift off slightly.

The bears argue that a doubling of house prices in the past five years represents a bubble which is now bursting and which could see prices fall by 20% or more.

"The speed of the slowdown in the housing market is likely to reinforce the market's growing belief that interest rates have peaked and further reduce interest rate expectations for end-2005," said Ed Stansfield of Capital Economics.

"We believe that our forecast of a 20% peak-to-trough fall in average house prices over the coming two or three years remains on track," he added.